Cal-Maine is the largest producer/marketer of shell eggs. They market both generic and value-added (free-range, low cholesterol, organic) through their 25.9% owned Egg-Land’s Best, Inc as well as through private label brands. About 37% of their revenues come from Wal-Mart and Sam’s Club.

Egg pricing peaked in 2008 resulting in an all-time record $6.40 in EPS for FY 2008 (ended May 31, 2008). Earnings predictability are low due to fluctuating feed prices for their flocks and widely variable wholesale pricing. Zacks now sees FY 2009 – 2010 estimates of $4.34 and $5.73 while Value Line takes a more conservative view at $4.00 and $4.80.

Even the lower VL projections put CALM’s multiple at < 6.2x FY 2009’s and 5.1x next fiscal year’s projections. If the numbers come in as expected the year-ahead dividend should be about $1.60 /share for a yield of 6.5% on today’s price.

Unless business seriously deteriorates, Cal-Maine shares do not seem to have a lot of downside. The absolute lows of calendar 2008 and 2009 were $20.80 and $17.01 during some of the worst panic selling in our lifetimes.

The $25 calls will be exercised. You will sell your shares for $25,000. The $22.50 puts will expire worthless. You will have no further option obligations. You will end up with no shares and $25,000 cash.

That’s a $5,990 net profit (plus any dividends) on an original outlay of $19,010 = 31.5% [achieved in under 6.5 months on shares that only needed to go up by 2% from the trade’s inception date].

What’s the risk?

If Cal-Maine shares finish Nov. 20, 2009 below $22.50:

The $25 calls will expire worthless. The $22.50 puts will be exercised. You will be forced to buy another 1000 shares and to lay out an additional $22,500 cash. You will end up with 2000 shares of CALM.

What’s the break-even on the whole trade?

On the first 1000 shares it’s their $24.51 purchase price less The $2.70 /share call premium = $21.81 /share.

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